When you’re asked to “go guarantor” for someone’s loan or business arrangement, it’s one of those moments where you need to understand exactly what you’re signing up for. Whether it’s helping your children buy their first home or supporting a business venture, becoming a guarantor is a serious legal commitment that deserves careful consideration. Let’s break down what this really means in plain language.

When Do Guarantees Come Up?

When a company, especially a new or small one, needs money or services, like a loan from a bank, a place to rent, or supplies from a vendor, the people providing these things (the “creditors”) often want extra assurance that they’ll be paid. Even though a company is its own legal entity, separate from its owners, creditors sometimes ask for a “personal guarantee.”

The other most common context in which a guarantee arises is when a person or people are applying for a home loan and someone else (usually a parent) “goes guarantor” as it is colloquially known. This has become increasingly common in NSW’s competitive property market, where rising prices make it challenging for buyers to save a 20% deposit.

What Is a Personal Guarantee?

Imagine a personal guarantee as a promise you make to a creditor. You’re saying, “If the borrower can’t pay its bills or keep its promises, I will personally step in and pay them using my own money and assets.”

Normally, if a company goes out of business or can’t pay its debts, its shareholders are protected, and only the company’s assets are at risk. A personal guarantee removes this protection. It means that if the company fails, the creditor can come after your personal belongings, like your house, savings, or other valuable possessions, to get their money back.

The same applies if you provide a personal guarantee in relation to a home loan. If the borrower doesn’t make their home loan repayments, the lender can come after the guarantors and their personal assets.

Understanding Unlimited Versus Limited Guarantees

Unlimited Guarantees

An unlimited guarantee means that the guarantor agrees to be responsible for 100% of the borrower’s debt if the borrower doesn’t pay or can’t pay. For example, if you guarantee a company loan or a home loan and the borrower goes broke and has no assets that can be used to satisfy the debt, the guarantor could be on the hook for the whole debt.

Limited Guarantees

A limited guarantee is a personal guarantee where the guarantor agrees to be responsible for a borrower’s debt or obligation, but only up to a specific, pre-agreed maximum amount.

Limited guarantees are quite common when it comes to home loan guarantees because the lender knows there is the underlying security of an asset that can be sold (the property being purchased), which should recoup most of the debt.

How Limited Guarantees Work with Home Loans

Usually, a bank or lender providing a home loan will want a limited guarantee if the borrower’s loan-to-value ratio (LVR) is too high. Most lenders will only lend a certain percentage of the value of the property to make sure that if they need to sell it because the borrower isn’t repaying the debt, they are protected from fluctuations in the property’s value.

For example, if a lender lent a borrower 100% of the value of a property worth $1,000,000 today, but the property market declined 20% in the next year reducing the value of the property to $800,000 and the lender had to foreclose, they would be at risk of selling the property for less than the amount of the loan and losing money.

This is where a guarantor can step in and provide additional security if the borrower needs to borrow more than the lender’s acceptable LVR. Most lenders will only lend on an LVR of 80% or less (that is, you can borrow up to 80% of the value of the property).

Alternative Options for First Home Buyers

Federal and state schemes are making it easier for first home buyers in particular to get into the market without needing a 20% deposit or a guarantor. These include the NSW First Home Buyer Assistance Scheme, the First Home Guarantee Scheme, and various stamp duty concessions that can significantly reduce the upfront costs of buying property.

The Bottom Line

Being a guarantor is serious business. You are putting your personal assets, like your house, savings, or other valuable possessions, on the line if the borrower can’t meet their obligations. Guarantees are also very common, however. The key is to get proper advice from an expert so you understand your obligations and the potential consequences if things don’t go to plan.

Before signing any guarantee, it’s essential to understand the full extent of your liability, your rights to withdraw from the guarantee, and what happens if circumstances change.

Need advice about going guarantor or understanding a guarantee document? Our experienced property law team can review the terms, explain your obligations in plain English, and help you make an informed decision. Book a consultation today to protect your interests before you sign.